Liquidity tightness is becoming alarming
Liquidity conditions are alarming. The system liquidity as measured by bids for repo in the RBI LAF (Liquidity Adjustment Facility) auction stood at over Rs 150,000 crores on the 17th and 18th of January 2012. The repo is the rate at which the RBI lends funds to the system and the demand for funds from the RBI has gone up from Rs 80,000 crores seen in end September 2011 to Rs 155,000 crores as of 18th January 2012. Liquidity has tightened by Rs 75,000 crores over the last three and half months.
The tightness in liquidity is despite infusion of primary liquidity by the RBI through government bond purchases and by lending to the government through overdraft. RBI has bought bonds worth Rs 61,000 crores over the last two months through OMO (Open Market Operations) purchase auctions. The government has drawn down Rs 49,420 crores as of 6th January 2012 from the WMA (Ways and Means Advances) window of the RBI. RBI buying of bonds and government running an overdraft is addition of funds into the system and a total of Rs 110,000 crores has been infused into the system over the last two months.
Where has all the money gone? The system is borrowing over Rs 150,000 crores from the RBI on a daily basis, which is higher by Rs 75,000 crores since end September 2011 despite an addition of Rs 110,000 crores of primary liquidity. The total leakage of liquidity since end September 2011 to date is Rs 185,000 crores.
Breaking down a few liquidity driving factors in the September 2011 to December 2011 period, Rs 51,000 crores can be accounted for by rise in notes in circulation and Rs 29,000 crores can be accounted for by the difference between aggregate credit and deposit figures i.e. banks have given out more credit than they have collected deposits. Leakage of currency and difference between credit and deposit account for Rs 80,000 crores of liquidity outflow.
The other factors that have affected liquidity include RBI selling of US Dollars in the currency markets. RBI sales figures as of November 2011 are around USD 2.9 billion as per CCIL (Clearing Corporation of India) data. RBI is seen to be selling more USD in the last couple of weeks and this selling has driven up the Rupee from Rs 53.25 to Rs 51. RBI currency intervention could have affected liquidity by Rs 40,000 crores (assuming RBI has sold a total of USD 8 billion in the market). RBI intervention coupled with currency leakage and credit and deposit difference account for Rs 120,000 crores of liquidity going out of the system.
The rest of the liquidity outflow i.e. Rs 185,000 crores less Rs 120,000 crores, which is Rs 65,000 crores cannot be accounted for by data available. It does look like a case of liquidity becoming structurally deficient with leakages across the system, part accounted and part unaccounted.
RBI has a lot of work to do on liquidity management given the current liquidity tightness, which is becoming alarming in proportions. RBI has to communicate its analysis on liquidity to the market, as a market that is befuddled by liquidity will push up money market rates. One year bank CD’s (Certificate of deposits) rates have shot up by 30bps over the last fifteen days and the rates are looking to trend higher from current levels of 9.95%. A market unclear on liquidity will rush to mop up any available liquidity at any cost leading to sharp rise in rates across.